End of development program is a lump of coal for Philly, Coatesville

by By Angela Couloumbis, HARRISBURG BUREAU, Posted: December 27, 2016

HARRISBURG - All that work for nothing.

That is how Philadelphia, Coatesville, and other municipalities are feeling after receiving rejection letters from Gov. Wolf's administration, signaling the state is slamming the brakes on expanding one of its marquee economic development programs.

The news landed like a lump of coal.

The Keystone Opportunity Zone (KOZ) program, which provides deep tax breaks in hopes of revitalizing abandoned, blighted, or underused properties, has long been touted by state and local officials as a success story. They say it has helped create nearly 10,000 jobs and pumped $1.5 billion in private development capital into communities, often in distressed areas.

The administration's argument for shutting off the spigot on new tax breaks boils down to dollars and cents: The state simply can't afford it.

"This is about money," Wolf spokesman Jeff Sheridan said last week, "and the state is strapped."

The KOZs seem to be the latest casualties of Pennsylvania's ever-deepening financial woes, as Wolf grapples yet again with a projected budget deficit and a legislature resistant to raising taxes.

Their looming battle - and Wolf's failure thus far to win any significant tax reform - were an undercurrent in the rejection letters his administration sent in recent weeks to communities seeking the KOZ designations.

Launched nearly two decades ago by Republican Gov. Tom Ridge and periodically expanded, the initiative exempts approved properties - often old industrial or commercial buildings - and their owners from some local and state taxes, usually for a decade.

It has had its critics. Financial auditors to academics have questioned its cost-effectiveness, noted that it has sometimes failed to live up to expectations and at other times has been used to benefit politically connected companies that were already planning on making an investment.

But state and local officials counter that it has over time helped turn hundreds of parcels that generate little or no tax revenue into income-producing properties.

So when the legislature tucked language into a tax-code bill this summer to accept new applicants for the program, several municipalities jumped.

One was Coatesville, the small but financially struggling city in one of the nation's wealthiest counties.

"We are fighting perceptions, we are fighting history, we are fighting reputation, we are up against it when it comes to Coatesville," said Sonia Huntzinger, the Chester County economic development administrator who focuses on Coatesville. "We were all holding out hope for the KOZ to help developers think differently about Coatesville."

The city's application sought a KOZ designation for, among other properties, a privately owned, 88-acre parcel on a swath of hillside where topography makes development difficult. The hope was that a KOZ designation could spur residential development there.

Huntzinger and other economic development administrators noted that after Wolf signed the legislation expanding the KOZ program last summer, the state did little to get the word out about it.

It was, they said, almost as if Pennsylvania officials wanted to discourage any new applications.

Indeed, though he signed the bill that reopened applications, the governor and his aides had warned legislators the state would not be authorizing new zones, according to interviews with legislative and administration aides.

"They were very clear about their disdain for some of these economic development tools, KOZs included," said Drew Crompton, the top lawyer for Senate Republicans. "They signed the bill because they knew they had discretion. As long as they got to determine whether they could approve it, they didn't care."

Duane Bumb, Philadelphia's deputy director of commerce, said it was weeks before city officials even learned that Wolf and the legislature had authorized new KOZ applications. Once they did, it became a breathless race to get approval from City Council and the School Reform Commission to apply.

The deadline to submit materials to the state was Oct. 1. Philadelphia's application pinpointed 85 properties totaling 328 acres, including several industrial properties in the city's Kensington section and in the Northeast.

Rejection letters began arriving at the end of November. Besides Coatesville and Philadelphia, applicants from Clearfield and Elk Counties were also rejected.

"The department is not acting favorably on your request," wrote Scott D. Dunkelberger, deputy secretary for business financing at the state Department of Community and Economic Development.

In unusually blunt language, Dunkelberger also wrote that Wolf, in his first year in office last year, had proposed overhauling the state's tax system to make it "more equitable" for all Pennsylvanians. Until such changes are enacted, Dunkelberger said it was "unlikely" the state would designate new properties for "special tax treatment."

Sheridan, Wolf's spokesman, would not comment on Dunkelberger's letter or say whether Wolf agreed with its hard-line language.

The KOZ program's future appears uncertain. Though the state has other incentive programs, it was one of the most attractive to businesses, said Bumb.

He added: "If Pennsylvania doesn't have an incentive program that can be competitive with neighboring states - and the KOZ program met that role - we are at a disadvantage."